Dividends — Declaration and Payment — Company Law Notes

Dividends — Declaration and Payment

A dividend is the shareholder’s reward — his share of the profits. But note the two-step: the company first recommends, then the members declare it at the AGM. And the moment it is declared, the mood changes entirely: it stops being a hope and becomes a debt the company must pay within 30 days or face 18% interest.

What is a dividend?

A dividend is the portion of a company’s profits distributed to its shareholders in proportion to their shareholding. It can be paid only out of profits, never out of capital (returning capital as “dividend” is illegal).

Rules for declaration and payment (ss.123, 127)

Source (s.123) — dividend may be declared/paid only out of: (a) the profits of the current year (after depreciation), or (b) accumulated past profits/free reserves, or (c) money provided by the government; never out of capital.
Recommend then declare — the Board recommends the rate; the members declare it at the AGM by ordinary resolution. Members cannot increase the rate the Board recommends (they may reduce it). Interim dividend is declared by the Board alone.
Deposit in a separate account — the declared amount must be deposited in a separate bank account within 5 days.
Payment within 30 days (s.127) — the dividend must be paid within 30 days of declaration. Default attracts interest at 18% p.a. and penalties on the defaulting directors.
Unpaid/unclaimed dividend — transferred to a special Unpaid Dividend Account and, if unclaimed for 7 years, to the Investor Education and Protection Fund (IEPF) (s.124/125).

Key idea (🔑): a declared dividend is a debt owed by the company to the shareholder — the shareholder can sue to recover it if it is not paid within 30 days.

Section 127: “Where a dividend has been declared by a company but has not been paid… within thirty days from the date of declaration… every director… shall be punishable… and the company shall be liable to pay simple interest at the rate of eighteen per cent. per annum during the period for which such default continues.”

In Simple Terms: A dividend is your slice of the profits — payable only from profits, recommended by the Board, and declared by the members. Once declared it is a debt: the company must pay within 30 days, or owe 18% interest and face penalties. You can sue for a declared-but-unpaid dividend.

flowchart LR
    A["Profits only (s.123)"]:::leaf --> B["Board recommends"]:::mid
    B --> C["Members declare at AGM (ordinary resolution)"]:::mid
    C --> D["Becomes a DEBT"]:::mid2
    D --> E["Pay within 30 days (s.127) else 18% interest"]:::leaf
    D --> F["Unclaimed -> Unpaid Dividend A/c -> IEPF (7 yrs)"]:::leaf
    classDef mid fill:#DCFCE7,stroke:#166534,color:#000;
    classDef mid2 fill:#FDE2E2,stroke:#991B1B,color:#000;
    classDef leaf fill:#E6F3FF,stroke:#1E3A8A,color:#000;
    linkStyle default stroke:#888,stroke-width:1px;

🧩 WORKED EXAMPLE — dividend declared but unpaid in 30 days

Facts. A company declares a dividend but does not pay it within thirty days of declaration. A shareholder wants to file a suit.

Rule. A declared dividend is a debt (s.127); it must be paid within 30 days, failing which the company pays 18% interest and directors are penalised.

Apply. The 30-day period has expired without payment; the shareholder’s right to the dividend has crystallised as a debt.

Conclusion. Advise the shareholder that he can sue to recover the declared dividend with 18% interest, and the defaulting directors face penalty under s.127.

Case Laws

Bacha F. Guzdar v CIT (1955) — dividend is the shareholder’s share of profits; agricultural income of the company does not retain its character in the shareholder’s hands.

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